Euromoney Audit Training

The central theme of the course will be to provide an in depth explanation for “tail risk” in capital markets and to provide quantitative methods for determining the level of macro or systematic risk in the financial environment. Techniques will be presented to address the often cited dichotomy of risk on/risk off, and
to provide a robust framework for revealing underlying correlations between major asset classes – FX, fixed income instruments, commodities and global equity indices. Asset managers and traders can then be alerted to possible tail risk events, and, more generally, with valuable clues as to whether the financial economy either supports taking on more risk and higher beta assets, or points to risk avoidance, defensive positioning and possibly shorting beta as a more suitable strategy.

Overview of Macro Analysis

Rather than taking specific securities and considering valuations and expected returns in isolation, the emphasis is much more focused on the inter-connection of items from different asset classes. This is in accordance with contemporary markets, where determination of the appropriate valuation of (say) the US or UK equity markets is, arguably, more affected by developments in sovereign credit markets and foreign exchange (at present specifically the euro and European sovereign risk), or by geo-political developments, as it is by the internal indicators regarding GDP growth, employment data for domestic economies.

The course will advocate an holistic approach to macro market analysis and investing and will explain this approach by examining inter-relationships across all relevant asset classes as expressed in the day to day co-movements revealed in global markets.

Methodology

The course covers four days of lectures which will feature many specific examples and case studies. There will also be collective exercises using certain techniques which will have been explained in prior sessions. Each day will consist of four separate ninety minute sessions with coffee breaks in the morning and afternoon with a lunch break in the middle.

Key areas the course covers

• Differentiation of systematic and systemic risk
• Description of the main techniques of global macro fund management strategies
• Economic fundamentals driving asset allocation strategies
• Macro-financial factors determining systematic and systemic risk
• Macro/micro factors in context of global imbalances and decoupling
• Exposure to emerging markets through exchange traded funds (ETF’s), futures contracts and other derivatives
• Intermingling of sovereign and private sector credit risk
• Credit Rating Agencies and validity of sovereign risk assessment models
• Structural credit risk within the Eurozone
• Hedging currency risk in a globally oriented portfolio
• Correlations between multiple asset classes – focusing especially on certain FX pairs and other assets which show high degrees of co-movement
• Measuring degree of risk appetite/aversion and systemic liquidity
• Commodities, emerging market business cycles and currency wars
• Models for determining the degree of liquidity and correlation tail risk within capital markets’ “internals”

Who should attend?

Asset managers, investors, and risk managers who have had exposure to “traditional” asset allocation techniques but are keen to explore innovative and quantitative approaches to the global macro style.

The course will provide supplementary skills and robust techniques for those seeking greater understanding
of underlying capital market dynamics and the major influences on systematic risk within the macro-financial
environment.

Supporting publication

Day 1:

The macro investing style

Overview of the “macro” style of investing

· Definitions and description of the macro style

· Contrast with other investment styles

· Relevance of macro vs. micro to global business cycle.

· History of the macro style – George Soros, Jim Rogers etc.

· Current popularity of macro hedge funds

· Asset allocation models driven by “big picture” judgments

· Themes in geographical and sector investing

· Differentiating macro fund style for client marketing purposes

Learning specifics

· Top down/bottom up approaches to asset allocation

· Overview of portfolio construction

· Overview of sector analysis

· Geographical sectors

· World GDP Statistics etc.

Case study: George Soros Quantum Fund
The Alchemy of Finance, George Soros, (Wiley 2003)

Major macro market influences

· Geo-political events - political crises, currency wars, trade policy

· Activities of supra-national bodies e.g. IMF, EU, UN, G20 etc.

· Monetary policies of US, EU and China - QE, capital controls

· Role of Chinese PBOC in debt and FX markets

· Protectionism, monetary policy and “fixed exchange rates”

Macro Asset Allocation Strategies

· Dispute with China regarding value of renminbi

· Increasing role of new EM economies, minor currencies

· Growing demand for, and scarcity of, commodities

· Thematic rotation Learning specifics

· Eurozone (EZ) crisis

· Asian inflation

· Civil disorder in Islam states

· Currency “war”

· Resource economies

· Australia

· Canada

· Chile

Case study: Global Imbalances focused on deficit economies of the West and the surplus economies of Asia
– Trade deficits/surpluses
– Savings glut and distortion to global interest rates
Preparation Text - Fixing Global Finance, Martin Wolf (Yale University Press 2009)

Systematic risk

· Global imbalances-surplus nations/ deficit nations

· Major changes in domestic economic policies/tactics

· Sovereign risk - role of major Credit Rating Agencies (CRA’s)

· Sovereign CDS market - how reliable are rates quoted?

· Safe haven/“flight to quality” - preferred asset classes - US Treasury bonds, gold, Swiss Franc

· Behaviour of USD, JPY and Swiss Franc in financial crises

· Explanation of the new focus on risk on/risk off asset classes and episodic market liquidity concerns

Learning specifics

· China/US relations

· Middle East

· Credit Ratings Agencies

· Characteristics/depth of US Treasury market

· Japanese Yen

· Swiss Franc

· US Dollar Index

Case study:
– Problems with Eurozone and peripheral nations
– European financial stability facility
Learning specifics
– Irish debt crisis
– EFSF
– ESM

Fundamental analysis, economic “narratives” and quantitative techniques

Session themes

· Fundamental bottom up analysis based on “micro” factors versus top down “macro” asset allocation models

· Examination of key correlations between sectors/geographical regions

· Co-movement of geographical/ business sectors and FX pairs – which may have “predictive” capabilities?

· Are traditional notions of portfolio diversification dead?

· Trading versus investment - long term/ short term strategies

· New risks in wake of 2008 crisis and new views of risk

· Fat tail events are more common expect the unexpected

Learning specifics

· New trading techniques have changed correlations between asset classes

· Algorithmic trading

· Relationship between equity markets and USD

Case study: Is alpha dead? Barclay’s claim that with stock dispersions historically low it is becoming very hard for fund managers to gain edge by seeking out alpha.
Preparation Text Barclays Study from July 2010, by head of quantitative strategies

Day 2:

Indices/sector investing and exchange traded funds

Global equity indices

Session themes

· Indices of world’s major markets - S&P 500, FTSE, DAX, NIKKEI

· Emerging market Indices - Mumbai, Shanghai, Bovespa etc.

· Core BRIC economies – extended Goldman Sachs definition

· Index futures and exchange traded derivatives

· Total returns versus index futures – no dividends

· Tax advantages of using certain derivatives e.g. CFD’s

· OTC global derivatives/index related swaps

· Credit Default Swaps for sovereigns, major multi-nationals

· De-coupling - myth or reality?

· Evidence from 2008/9 suggests that de-coupling disappears in crisis

Learning specifics

· Summary of all major market equity indices and their derivatives

· Financial infrastructure for China, India, Brazil, Russia

· Have the EM market decoupled from mature economies?

Case study:
– Derivatives indices and other proprietary indices for sectors/sovereigns

Exchange traded funds

Session themes

· Overview of the funds available, packaging, fiduciary/trust arrangements, liquidity of ETF’s, exchanges where traded

· ETF’s are structured products - costs, benefits, surging popularity

· SPY, proxy for S&P 500 is most traded instrument daily in US markets

· Trade in real time - easy access to trading - not end of day funds

· Many track MSCI indices or some arbitrary sector

· Inverse funds, leveraged funds, managed funds

· Tracking error-weakness in inverse or short funds over the longer term

· Commodity based -GLD owns gold - not futures

· Can an ETF collapse?

Learning specifics

· Review of major index ETF’s from US market

· SPY, QQQQ, IWM, DIA

· Inverse ETF’s

· For equities, commodities

· Non-US based ETF’s

Case study: Examination of limitations of inverse ETF’s for major indices allowing one to be long an instrument which is short an index.
– Specific inverse ETF’s e.g. SDS, FAZ,EWV, EUO

Commodities

Session themes

· Traditional notion - commodities were negatively correlated to equities - replaced by more coupled relationship because of increased role of China and other resource hungry economies

· Resource services based ETF’s - e.g. oil services, exploration etc.
Resource based ETF’s – industrial metals, agricultural, energy

· Physicals versus derivatives exposure to commodities

· Much greater access for retail and small fund investors to this asset class

· Commodity Index exchange traded funds

Learning specifics

· Commodity Indices

· Energy markets

· Base metals

· ETF’s

· DBB, DBC, DBA

Case study: China and copper China uses more than half the world’s iron ore and more than 40% of its steel, aluminum, and coal and is largest consumer of copper.
– China is the biggest player in the copper market, buying 35% of the global supply

Sector rotation and business cycles

Session themes

· Is the business cycle still valid?

· Global dynamics have invalidated much traditional macro-economic theory regarding economic cycles

· Greater emphasis on cycles in the financial economy

· Correlations between certain business sectors and geographical funds

· e.g. semiconductor stocks and funds for Taiwan, Korea

· Using ETF’s for exposure to fixed income instruments

· Playing the Treasury yield curve with ETF’s of different durations

· ETF’s based on bond prices and bond yields

· Examination of ETF’s which provide exposure to emerging market sovereign
debt, high yield debt and investment grade corporate debt

Learning specifics

· Comparison of early and late cyclical sectors, industrials, discretionary

· Specific ETF’s

· SMH, XSD and EWT, EPP

Case study:
– Is the notion of a business cycle still valid?
– Examine the relationship between consumer staples and consumer discretionary sectors, early/late cyclical sectors, industrial, financials
– Examine ETF’s related to business cycles: XLP, XLY, XME, XLI, XLF, KBE

Day 3:

Key macro influences and risks: foreign exchange, monetary policy and sovereign risks

Risk management in a globally inter-dependent world

Session themes

· Previously considered minor/local issues have global impact

· Investment based on fundamental analysis can experience large unexpected impact from events such as crisis in Greece/Ireland

· Relationship of macro volatility and market liquidity

· Protection of portfolios during highly volatile periods

· Technical indicators which can act as precursors to episodes of heightened volatility
Volatility trading with options on FX, equity indices

· Traditional notions of portfolio diversification are outmoded

Learning specifics

· Using derivatives/futures for short term protection

· Volatility Indicators such as CBOE VIX

· Historical volatility

· Implied volatility from options and derivatives

· Volatility trading

Case study: Using correlation analysis between key FX pairs such as AUD/USD and AUD/JPY and major ETF’s to anticipate market inflection points.
– Historical analysis of co movements of AUD/USD and SPY and EEM based on tutor’s inter-market tools/ analytical framework

Foreign exchange market

· De-centralized, 24 hours, spot/ forwards

· FX market is largest capital market - size, key currencies

· Major participants - role of banks, hedge funds, governments

· Speculation, settlement of international transactions, interventions and official exchange rate policy

· Carry trade - AUD/USD, AUD/JPY, NZD etc.

· Use of carry trade by shadow banking system – leverage

· Role of high yielding currencies e.g. Australian dollar

· Resource currencies

Learning specifics

· US Dollar Index

· Carry trade

· Resource currencies

· Australian Dollar

· Canadian Dollar

· Managed currencies

· Singapore Dollar

· Chinese Renminbi

Case study/discussion:
– BIS Triennial Survey of FX and derivatives market
– “The objective of the survey is to provide the most comprehensive and internationally consistent information on the size and structure of global foreign exchange markets”
Preparation text: Triennial Central Bank Survey of Foreign Exchange and Derivatives
Market Activity, September 2010

Sovereign risk

Session themes

· Deterioration in public balance sheets - high debt/GDP ratios

· Global imbalances - surplus/deficit nations

· Symbiotic relationship of US/China

· Hilary Clinton - “How do you get tough with your banker?” re Sino/US
diplomacy

· Increasing role of sovereign CDS market

• Clive Corcoran

  Clive Corcoran is an FSA registered adviser and provides wealth management services and investment advice to private clients and funds. He has also been an independent trader, on both sides of the Atlantic, for more than 20 years and has more recently focused on providing executive education workshops and individual mentoring.
  
  As an author he has written Long/Short Market Dynamics: Trading Strategies for Today’s Markets (Wiley, 2007) and three textbooks, Financial Markets, Portfolio Construction Theory and Wealth Management, and Securities (all published in 2010), which are foundation items for those seeking the Master’s qualification from the Chartered Institute for Securities and Investment, where he is an Associate.
  
  He is also a director of Morphology Management Inc. which has developed a systematic trading platform which includes pattern recognition technologies and implements inter-market strategies in the global equities and foreign currency markets. He has been a regular analyst/contributor to CNBC Europe and other broadcast outlets, runs executive education workshops in conjunction with ICMA and Thomson Reuters, and has been a featured speaker at international trading expos. He is currently writing a new book focused on examining limitations within current macro-economic theory in relation to the understanding of systemic liquidity and sovereign risk, and which outlines the benefits of using an inter-market analytical approach.

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

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